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New unit root asymptotics in the presence of deterministic trends

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  • Phillips, Peter C. B.

Abstract

Recent work by the author (1998) has shown that stochastic trends can be validly represented in empirical regressions in terms of deterministic functions of time. These representations offer an alternative mechanism for modelling stochastic trends. It is shown here that the alternate representations affect the asymptotics of all commonly used unit root tests in the presence of trends. In particular, the critical values of unit root tests diverge when the number of deterministic regressors K -+ rn as the sample size n + w. In such circumstances, use of conventional critical values based on fixed K will lead to rejection of the null of a unit root in favour of trend stationarity with probability one when the null is true. The results can be interpreted as saying that serious attempts to model trends by deterministic functions will always be successful and that these functions can validly represent stochastically trending data even when lagged variables are present in the regressor set, thereby undermining conventional unit root tests.
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Suggested Citation

  • Phillips, Peter C. B., 2002. "New unit root asymptotics in the presence of deterministic trends," Journal of Econometrics, Elsevier, vol. 111(2), pages 323-353, December.
    • Handle: RePEc:eee:econom:v:111:y:2002:i:2:p:323-353
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    References listed on IDEAS

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    1. Phillips, P.C.B., 1986. "Understanding spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 33(3), pages 311-340, December.
    2. Zhije Xiao & Peter C.B. Phillips, 1998. "An ADF coefficient test for a unit root in ARMA models of unknown order with empirical applications to the US economy," Econometrics Journal, Royal Economic Society, vol. 1(RegularPa), pages 27-43.
    3. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    4. Keuzenkamp, H.A. & McAleer, M., 1994. "Simplicity, scientific inference and econometric modelling," Discussion Paper 1994-56, Tilburg University, Center for Economic Research.
    5. Phillips, Peter C B & Ploberger, Werner, 1996. "An Asymptotic Theory of Bayesian Inference for Time Series," Econometrica, Econometric Society, vol. 64(2), pages 381-412, March.
    6. Phillips, Peter C B, 1996. "Econometric Model Determination," Econometrica, Econometric Society, vol. 64(4), pages 763-812, July.
    7. Peter C. B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Econometrica, Econometric Society, vol. 67(5), pages 1057-1112, September.
    8. Phillips, P C B, 1987. "Time Series Regression with a Unit Root," Econometrica, Econometric Society, vol. 55(2), pages 277-301, March.
    9. Werner Ploberger & Peter C. B. Phillips, 2003. "Empirical Limits for Time Series Econometric Models," Econometrica, Econometric Society, vol. 71(2), pages 627-673, March.
    10. Peter C. B. Phillips, 1998. "New Tools for Understanding Spurious Regressions," Econometrica, Econometric Society, vol. 66(6), pages 1299-1326, November.
    11. Peter C.B. Phillips & Victor Solo, 1989. "Asymptotics for Linear Processes," Cowles Foundation Discussion Papers 932, Cowles Foundation for Research in Economics, Yale University.
    12. Zellner,Arnold & Keuzenkamp,Hugo A. & McAleer,Michael (ed.), 2002. "Simplicity, Inference and Modelling," Cambridge Books, Cambridge University Press, number 9780521803618, September.
    13. Durlauf, Steven N & Phillips, Peter C B, 1988. "Trends versus Random Walks in Time Series Analysis," Econometrica, Econometric Society, vol. 56(6), pages 1333-1354, November.
    14. Keuzenkamp, H.A. & McAleer, M., 1994. "Simplicity, scientific inference and econometric modelling," Other publications TiSEM dabcc476-15d7-4177-a2f5-b, Tilburg University, School of Economics and Management.
    15. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
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    Cited by:

    1. Tilak Abeysinghe & Gulasekaran Rajaguru, 2009. "A Gaussian Test for Cointegration," Microeconomics Working Papers 22013, East Asian Bureau of Economic Research.
    2. Phillips, Peter C.B., 2005. "Challenges of trending time series econometrics," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 68(5), pages 401-416.
    3. Peter C.B. Phillips & Zhipeng Liao, 2012. "Series Estimation of Stochastic Processes: Recent Developments and Econometric Applications," Cowles Foundation Discussion Papers 1871, Cowles Foundation for Research in Economics, Yale University.
    4. Moon, Hyungsik Roger & Perron, Benoit & Phillips, Peter C.B., 2007. "Incidental trends and the power of panel unit root tests," Journal of Econometrics, Elsevier, vol. 141(2), pages 416-459, December.
    5. Phillips, Peter C.B., 2014. "Optimal estimation of cointegrated systems with irrelevant instruments," Journal of Econometrics, Elsevier, vol. 178(P2), pages 210-224.
    6. Phillips, Peter C. B., 2001. "Trending time series and macroeconomic activity: Some present and future challenges," Journal of Econometrics, Elsevier, vol. 100(1), pages 21-27, January.
    7. Tanaka, Katsuto & 田中, 勝人, 2011. "Linear Nonstationary Models : A Review of the Work of Professor P.C.B. Phillips," Discussion Papers 2011-05, Graduate School of Economics, Hitotsubashi University.
    8. Peter C. B. Phillips, 2003. "Laws and Limits of Econometrics," Economic Journal, Royal Economic Society, vol. 113(486), pages 26-52, March.
    9. Peter C. B. Phillips & Xiaohu Wang & Yonghui Zhang, 2019. "HAR Testing for Spurious Regression in Trend," Econometrics, MDPI, vol. 7(4), pages 1-28, December.
    10. Shahidur Rahman, 2005. "An Alternative Estimation to Spurious Regression Model," Economic Growth Centre Working Paper Series 0507, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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